Last month Steven Davidoff (the New York Times' Deal Professor) wrote a column on the hostile takeover bid for CommonWealth REIT by two hedge funds: What’s at Stake in the Fight Over a REIT (Apr. 18, 2013). He highlighted the fact that CommonWealth has a bylaw provision that requires arbitration of any shareholders' disputes. Apparently when the REIT filed its registration statement for its public offering with the SEC, the agency, consistent with its longstanding position that such arbitration provisions in public corporations violate the antiwaiver provisions in federal securities laws, required the REIT to delete the provision. But not to be thwarted, after the offering, the CommonWealth board amended the bylaws and reinstated the arbitration clause. As Davidoff nicely frames the issue:

"If the Maryland court upholds CommonWealth's arbitration provision, more companies like Commonwealth can simply adopt these bylaws. They can then take aggressive positions to resist a takeover, and the results will be sent to the black hole of an arbitration conducted in secret and with no timeline for an outcome."

At least as of now, CommonWealth is victorious. On May 8, 2013, the Circuit Court for Baltimore City held that the arbitration bylaw is enforceable. In a case of first impression for the Maryland courts, the court emphasized that arbitration is strongly favored as a matter of public policy and applied contract law principles to determine that there was both mutual assent and consideration to make the arbitration bylaw enforceable as a contract term. Although the court's language is broad and states that constructive knowledge is sufficient, the court also found that the plaintiffs -- who, the court noted, were "two very sophisticated parties" -- had actual knowledge of the arbitration bylaw and assented to it by their stock purchases. The court also rejected plaintiffs' arguments that defendants' unilateral power to amend the bylaws made the agreement unfairly one-sided, citing case law that courts should not look beyond the "four corners" of the arbitration agreement in determining whether it is valid and enforceable. "Because the Trustees' power to amend or revoke the Arbitration Bylaws springs from legitimate, legal sources, outside the "four corners" of the Arbitration Agreement -- namely, the company's Declaration of Trust and Maryland REIT law -- Plaintiffs' argument must fail."

So, to quote Professor Davidoff again, we now have our first ruling on this critical issue, "with real consequences for the takeover market." I suspect that an appeal is under serious consideration.